Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to______
Commission File Number: 001-36410
Phibro Animal Health Corporation
(Exact name of registrant as specified in its charter)
Delaware
13-1840497
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
Glenpointe Centre East, 3rd Floor
07666-6712
300 Frank W. Burr Boulevard, Suite 21
(Zip Code)
Teaneck, New Jersey
(Address of Principal Executive Offices)
(201) 329-7300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per share
PAHC
Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 29, 2021, there were 20,337,574 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 20,166,034 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.
PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
Page
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
3
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
4
Consolidated Balance Sheets
5
Consolidated Statements of Cash Flows
6
Consolidated Statements of Changes in Stockholders’ Equity
7
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
PART II—OTHER INFORMATION
Legal Proceedings
38
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
39
Item 5.
Other Information
SIGNATURES
40
2
Item 1. Financial Statements
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months
Nine Months
For the Periods Ended March 31
2021
2020
(unaudited)
(in thousands, except per share amounts)
Net sales
$
211,729
210,739
613,072
614,471
Cost of goods sold
142,564
141,188
411,523
418,153
Gross profit
69,165
69,551
201,549
196,318
Selling, general and administrative expenses
49,033
48,232
145,839
145,243
Operating income
20,132
21,319
55,710
51,075
Interest expense, net
2,933
3,263
8,957
10,049
Foreign currency (gains) losses, net
(583)
(608)
(3,590)
1,895
Income before income taxes
17,782
18,664
50,343
39,131
Provision for income taxes
5,621
5,163
13,079
11,221
Net income
12,161
13,501
37,264
27,910
Net income per share
basic
0.30
0.33
0.92
0.69
diluted
Weighted average common shares outstanding
40,483
40,454
40,463
40,504
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Change in fair value of derivative instruments
5,749
(9,995)
10,567
(9,999)
Foreign currency translation adjustment
(9,122)
(23,873)
(4,345)
(28,493)
Unrecognized net pension gains
144
129
416
387
(Provision) benefit for income taxes
(1,473)
2,457
(2,745)
2,394
Other comprehensive income (loss)
(4,702)
(31,282)
3,893
(35,711)
Comprehensive income (loss)
7,459
(17,781)
41,157
(7,801)
CONSOLIDATED BALANCE SHEETS
March 31,
June 30,
As of
(in thousands, except share and per share amounts)
ASSETS
Cash and cash equivalents
49,103
36,343
Short-term investments
44,000
55,000
Accounts receivable, net
135,562
126,522
Inventories, net
206,258
196,659
Other current assets
36,795
37,313
Total current assets
471,718
451,837
Property, plant and equipment, net
150,188
148,109
Intangibles, net
64,434
70,997
Goodwill
52,679
Other assets
65,998
60,478
Total assets
805,017
784,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt
23,437
18,750
Accounts payable
62,803
66,091
Accrued expenses and other current liabilities
82,651
72,397
Total current liabilities
168,891
157,238
Revolving credit facility
176,000
169,000
Long-term debt
180,786
199,257
Other liabilities
63,419
70,401
Total liabilities
589,096
595,896
Commitments and contingencies (Note 8)
Common stock, par value $0.0001 per share; 300,000,000 Class A shares authorized, 20,337,574 and 20,287,574 shares issued and outstanding at March 31, 2021, and June 30, 2020, respectively. 30,000,000 Class B shares authorized, 20,166,034 shares issued and outstanding at March 31, 2021, and June 30, 2020
Preferred stock, par value $0.0001 per share; 16,000,000 shares authorized, no shares issued and outstanding
—
Paid-in capital
136,654
135,525
Retained earnings
205,755
183,060
Accumulated other comprehensive loss
(126,492)
(130,385)
Total stockholders’ equity
215,921
188,204
Total liabilities and stockholders’ equity
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization
24,042
24,177
Amortization of debt issuance costs
662
Stock-based compensation
1,129
1,694
Acquisition-related items
480
Deferred income taxes
18
(1,279)
(7,293)
676
Other
389
620
Changes in operating assets and liabilities, net of business acquisitions:
(8,410)
4,009
(8,091)
6,584
3,746
(1,841)
(1,019)
(1,369)
(751)
(4,159)
Accrued expenses and other liabilities
3,550
(2,693)
Net cash provided by operating activities
45,236
55,471
INVESTING ACTIVITIES
Purchases of short-term investments
(50,000)
(55,000)
Maturities of short-term investments
61,000
24,000
Capital expenditures
(22,226)
(23,969)
Business acquisitions
-
(54,549)
Other, net
(164)
(1,339)
Net cash used by investing activities
(11,390)
(110,857)
FINANCING ACTIVITIES
Revolving credit facility borrowings
135,000
194,000
Revolving credit facility repayments
(128,000)
(144,000)
Payments of long-term debt and other
(14,063)
(9,486)
Dividends paid
(14,569)
(14,563)
Net cash provided (used) by financing activities
(21,632)
25,951
Effect of exchange rate changes on cash
546
(1,390)
Net increase (decrease) in cash and cash equivalents
12,760
(30,825)
Cash and cash equivalents at beginning of period
57,573
Cash and cash equivalents at end of period
26,748
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Shares of
Common
Preferred
Paid-in
Retained
Comprehensive
Stock
Capital
Earnings
Income (Loss)
Total
(in thousands, except share amounts)
As of June 30, 2020
40,453,608
12,302
(3,805)
8,497
Dividends declared ($0.12 per share)
(4,854)
Stock-based compensation expense
565
As of September 30, 2020
136,090
190,508
(134,190)
192,412
Comprehensive income
12,801
12,400
25,201
(4,855)
564
As of December 31, 2020
198,454
(121,790)
213,322
Shares issued pursuant to stock incentive plan
50,000
(4,860)
As of March 31, 2021
40,503,608
As of June 30, 2019
133,266
168,926
(86,181)
216,015
2,515
(7,547)
(5,032)
As of September 30, 2019
133,831
166,587
(93,728)
206,694
11,894
3,118
15,012
As of December 31, 2019
134,395
173,626
(90,610)
217,415
As of March 31, 2020
134,960
182,273
(121,892)
195,345
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Phibro Animal Health Corporation (“Phibro” or “PAHC”) and its subsidiaries (together, the “Company”) is a diversified global developer, manufacturer and marketer of a broad range of animal health and mineral nutrition products for food animals including poultry, swine, dairy and beef cattle, and aquaculture. The Company is also a manufacturer and marketer of performance products for use in the personal care, industrial chemical and chemical catalyst industries. Unless otherwise indicated or the context requires otherwise, references in this report to “we,” “our,” “us,” and similar expressions refer to Phibro and its subsidiaries.
The unaudited consolidated financial information for the three and nine months ended March 31, 2021 and 2020, is presented on the same basis as the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (the “Annual Report”), filed with the Securities and Exchange Commission on August 26, 2020 (File no. 001-36410). In the opinion of management, these financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of the Company for the interim periods, and the adjustments are of a normal and recurring nature. The financial results for any interim period are not necessarily indicative of the results for the full year. The consolidated balance sheet information as of June 30, 2020, was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain. Although vaccines are now available, distribution efforts vary widely country-by-country and state-by-state. New information may continue to emerge concerning COVID-19, and the actions required to contain or treat it may affect the duration and severity of the pandemic. The pandemic may have significant economic impacts on customers, suppliers and markets. The pandemic may affect our future revenues, expenses, reserves and allowances, manufacturing operations and employee-related costs. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.
The consolidated financial statements include the accounts of Phibro and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated from the consolidated financial statements. The decision to consolidate an entity requires consideration of majority voting interests, as well as effective control over the entity.
2. Summary of Significant Accounting Policies and New Accounting Standards
Our significant accounting policies are described in the notes to the consolidated financial statements included in our Annual Report. As of March 31, 2021, there have been no material changes to any of the significant accounting policies contained therein.
Net Income per Share and Weighted Average Shares
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period after giving effect to potential dilutive common shares resulting from the assumed exercise of stock options and vesting of restricted stock units. All common share equivalents were included in the calculation of diluted net income per share in the periods included in the consolidated financial statements.
Weighted average number of shares – basic
Dilutive effect of stock options and restricted stock units
21
50
41
Weighted average number of shares – diluted
New Accounting Standards
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2020-04 and 2021-01, Reference Rate Reform (Topic 848), provide optional expedients and exceptions to GAAP guidance, if certain criteria are met, for contracts, hedging relationships and derivative instruments that reference the London Interbank Offered Rate (LIBOR) and other interbank offered rates expected to be discontinued or modified by rate reform. The overall purpose of Topic 848 is to ease the financial reporting burdens related to the expected market transition to alternative reference rates. These ASUs may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, removes certain exceptions and amends certain requirements in the existing income tax guidance to ease accounting requirements. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of this guidance on our consolidated financial statements.
ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, modifies existing disclosure requirements for defined benefit pension and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. We continue to evaluate the effect of adoption of this guidance on our disclosures.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, modifies existing disclosure requirements for fair value measurement. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019. The adoption did not have a material effect on our fair value measurement disclosures.
3. Statements of Operations—Additional Information
Disaggregated revenue, deferred revenue and customer payment terms
We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle, and aquaculture. The products help prevent, control and treat diseases, enhance nutrition to help improve health and contribute to balanced mineral nutrition. The animal health and mineral nutrition products are sold directly to integrated poultry, swine and cattle integrators and through commercial animal feed manufacturers, wholesalers and distributors. The animal health industry and demand for many of the animal health products in a particular region are affected by changing disease pressures and by weather conditions, as product usage follows varying weather patterns and seasons. Our operations are primarily focused in regions where the majority of livestock production is consolidated in large commercial farms.
9
We have a diversified portfolio of products that are classified within our three business segments—Animal Health, Mineral Nutrition and Performance Products. Each segment has its own dedicated management and sales team.
Animal Health
The Animal Health business develops, manufactures and markets products in three main categories:
Mineral Nutrition
The Mineral Nutrition business is comprised of formulations and concentrations of trace minerals such as zinc, manganese, copper, iron, and other compounds, with a focus on customers in North America. Our customers use these products to fortify the daily feed requirements of their livestock’s diets and maintain an optimal balance of trace elements in each animal. We manufacture and market a broad range of mineral nutrition products for food animals including poultry, swine and beef and dairy cattle.
Performance Products
The Performance Products business manufactures and markets specialty ingredients for use in the personal care, industrial chemical and chemical catalyst industries, predominantly in the United States.
The following tables present our revenues disaggregated by major product category and geographic region:
Net Sales by Product Type
MFAs and other
78,530
82,670
238,810
249,659
Nutritional specialties
36,978
34,636
105,972
98,131
Vaccines
18,872
21,668
54,205
56,723
Total Animal Health
134,380
138,974
398,987
404,513
58,153
56,200
163,750
164,534
19,196
15,565
50,335
45,424
10
Net Sales by Region
United States
129,370
126,826
370,446
368,230
Latin America and Canada
37,386
40,284
115,808
119,730
Europe, Middle East and Africa
27,802
31,958
84,959
83,311
Asia Pacific
17,171
11,670
41,859
43,200
Net sales by region are based on country of destination.
Deferred revenue was $3,815 and $4,570 as of March 31, 2021, and June 30, 2020, respectively. Accrued expenses and other current liabilities included $1,325 and $1,109 of the total deferred revenue as of March 31, 2021, and June 30, 2020, respectively. The deferred revenue resulted primarily from certain customer arrangements, including technology licensing fees and discounts on future product sales. The transaction price associated with our deferred revenue arrangements is generally based on the stand-alone sales prices of the individual products or services.
Our customer payment terms generally range from 30 to 120 days globally and do not include any significant financing components. Payment terms vary based on industry and business practices within the regions in which we operate. Our average worldwide collection period for accounts receivable is approximately 60 days after the revenue is recognized.
Interest Expense and Depreciation and Amortization
Term loan
1,857
1,888
5,796
5,967
938
1,400
3,017
4,361
221
220
65
153
191
441
Interest expense
3,081
3,661
9,666
11,431
Interest income
(148)
(398)
(709)
(1,382)
Depreciation of property, plant and equipment
5,763
5,824
17,479
17,395
Amortization of intangible assets
2,155
2,325
6,563
6,659
Amortization of other assets
99
123
7,918
8,248
11
4. Balance Sheets—Additional Information
Inventories
Raw materials
61,457
73,837
Work-in-process
11,587
8,881
Finished goods
133,214
113,941
Goodwill roll-forward
Balance at beginning of period
27,348
Osprey acquisition
25,331
Balance at end of period
ROU operating lease assets
31,842
22,873
8,245
11,430
Deposits
5,024
5,158
Insurance investments
5,891
5,801
Equity method investments
4,290
4,219
Fair value of derivative
2,705
Indemnification asset
3,000
Debt issuance costs
638
1,021
7,363
6,976
We evaluate our investments in equity method investees for impairment if circumstances indicate that the fair value of the investment may be impaired. The assets underlying a $2,583 equity investment are currently idle. We concluded the investment is not impaired based on expected future operating cash flows and disposal value.
Employee-related
30,823
25,825
Current operating lease liabilities
6,354
6,439
Commissions and rebates
6,545
5,782
Professional fees
6,284
5,766
Income and other taxes
3,466
3,821
Derivatives
5,325
5,757
Contingent consideration
4,840
Restructuring costs
1,135
2,314
Insurance-related
1,360
1,272
16,519
15,421
In connection with productivity and cost-saving initiatives in the Animal Health segment, we incurred business restructuring costs related to the termination of a contract manufacturing agreement and employee separation charges.
12
The following table summarizes the activity of the restructuring liability during the nine months ended March 31, 2021:
Liability balance at June 30, 2020
2,860
Charges
Payments
(1,725)
Liability balance at March 31, 2021
As of March 31, 2021, $800 and $335 of the restructuring liability balance related to contract termination and employee separation costs, respectively.
Long-term operating lease liabilities
27,007
17,276
Long-term and deferred income taxes
12,366
11,680
Supplemental retirement benefits, deferred compensation and other
8,463
8,067
International retirement plans
5,360
5,499
U.S. pension plan
1,349
3,563
261
7,691
Other long-term liabilities
8,613
11,239
Accumulated other comprehensive income (loss)
Derivative instruments
(2,881)
(13,448)
(108,083)
(103,738)
Unrecognized net pension losses
(22,155)
(22,571)
Benefit for income taxes on derivative instruments
615
3,256
Benefit for incomes taxes on long-term intercompany investments
8,166
Provision for income taxes on net pension losses
(2,154)
(2,050)
5. Debt
Term Loans and Revolving Credit Facilities
2021 Credit Agreement – Subsequent Event
In April 2021, we entered into an amended and restated credit agreement (the “2021 Credit Agreement”) under which we have a term A loan in an aggregate initial principal amount of $300,000 (the “2021 Term A Loan”) and a revolving credit facility under which we can borrow up to $250,000, subject to the terms of the agreement (the “2021 Revolver” and together with the 2021 Term A Loan, the “2021 Credit Facilities”). The 2021 Credit Agreement amends and restates the credit agreement entered into in June 2017 (the “2017 Credit Agreement”). The 2021 Credit Facilities were used to refinance all of the Term A loans and revolving credit facility amounts outstanding under the 2017 Credit Agreement and to pay fees and expenses of the transaction. The 2021 Revolver contains a letter of credit facility. The 2021 Credit Facilities mature in April 2026. Refer to “Note 12 – Subsequent Event” for further information.
13
2017 Credit Agreement
At March 31, 2021, under the 2017 Credit Agreement, we had a term A loan with an aggregate initial principal amount of $250,000 (the “2017 Term A Loan”) and a revolving credit facility under which we could borrow up to $250,000, subject to the terms of the agreement (the “2017 Revolver” and together with the 2017 Term A Loan, the “2017 Credit Facilities”). The interest rate per annum applicable to the loans under the 2017 Credit Facilities was based on a fluctuating rate of interest plus an applicable rate equal to 2.00%, 1.75% or 1.50%, in the case of LIBOR and Eurodollar rate loans and 1.00%, 0.75% or 0.50%, in the case of base rate loans; the applicable rates were based on the First Lien Net Leverage Ratio, as defined in the 2017 Credit Agreement. The LIBOR rate was subject to a floor of 0.00%. The 2017 Credit Facilities would have matured in June 2022.
The 2017 Credit Agreement required, among other things, compliance with financial covenants that permitted: (i) a maximum First Lien Net Leverage Ratio of 4.00:1.00 and (ii) a minimum interest coverage ratio of 3.00:1.00, each calculated on a trailing four-quarter basis. The 2017 Credit Agreement contained an acceleration clause should an event of default (as defined in the 2017 Credit Agreement) occur. As of March 31, 2021, we were in compliance with the financial covenants.
As of March 31, 2021, we had $176,000 in borrowings under the 2017 Revolver and had outstanding letters of credit of $2,709, leaving $71,291 available for borrowings and letters of credit under the 2017 Revolver. We obtain letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and other contractual obligations. The terms of these letters of credit are all less than one year.
In July 2017, we entered into an interest rate swap agreement on $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325%, plus the applicable rate. The agreement matures in June 2022. We designated the interest rate swap as a highly effective cash flow hedge. For additional details, see “Note 9 — Derivatives.”
In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.62%, plus the applicable rate. In July 2022, this agreement increases to a notional principal amount of $300,000 through June 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.62%, plus the applicable rate. We designated the interest rate swaps as highly effective cash flow hedges. For additional details, see “Note 9 — Derivatives.”
The 2017 and 2020 interest rate swap agreements will continue to remain in place on our interest obligations associated with the 2021 Credit Facilities.
As of March 31, 2021, the interest rates for the 2017 Revolver and the 2017 Term A Loan were 2.14% and 3.26%, respectively. The weighted-average interest rates for the 2017 Revolver were 2.25% and 3.44% for the nine months ended March 31, 2021 and 2020, respectively. The weighted-average interest rates for the 2017 Term A Loan were 3.36% and 3.45% for the nine months ended March 31, 2021 and 2020, respectively.
Long-Term Debt
2017 Term A Loan due June 2022
204,687
218,750
Unamortized debt issuance costs
(464)
(743)
204,223
218,007
Less: current maturities
(23,437)
(18,750)
14
6. Leases
Our lease portfolio consists of real estate, vehicles and equipment ROU assets, classified as operating leases. During the three months ended March 31, 2021, we amended and extended the lease agreement for our corporate office, increasing the value of our lease commitments. The remaining non-cancelable lease terms, inclusive of renewal options reasonably certain of exercise, range from one to 15 years.
The following table summarizes the ROU assets and the related lease liabilities recorded on the consolidated balance sheet:
Balance Sheet Classification
Assets:
Operating lease ROU assets
Other Assets
Liabilities:
Current portion
Non-current portion
Total operating lease liabilities
33,361
23,715
March 31, 2021
June 30, 2020
Weighted average remaining lease term (in years) - ROU operating leases
8.61
6.49
Weighted average discount rate - ROU operating leases
4.07
%
4.40
The following table summarizes the composition of net lease expense:
Three Months Ended
Nine Months Ended
Operating lease expense
1,919
1,885
5,901
5,647
Variable lease expense
317
361
928
992
Short-term lease expense
219
196
622
613
Total lease expense
2,455
2,442
7,451
7,252
The following table includes supplemental cash flow information:
Operating cash flows used for ROU operating leases
6,131
5,529
Right of use assets obtained in exchange for new operating lease liabilities
13,882
8,591
15
At March 31, 2021, maturities of future lease liabilities were:
For the Years Ending June 30,
2,047
2022
7,047
2023
5,143
2024
4,101
2025
3,320
2026 and thereafter
18,357
Total lease payments
40,015
Less: interest
6,654
There were no significant future payment obligations related to executed lease agreements for which the related lease had not yet commenced as of March 31, 2021. Our lease agreements do not contain any material restrictive covenants or residual guarantee provisions.
7. Related Party Transactions
Certain relatives of Jack C. Bendheim, our Chairman, President and Chief Executive Officer, provided services to us as employees or consultants and received aggregate compensation and benefits of approximately $372 and $364 during the three months ended March 31, 2021 and 2020, respectively, and $1,297 and $1,204 during the nine months ended March 31, 2021 and 2020, respectively. Mr. Bendheim has sole authority to vote shares of our stock owned by BFI Co., LLC, an investment vehicle of the Bendheim family.
8. Commitments and Contingencies
Environmental
Our operations and properties are subject to extensive federal, state, local and foreign laws and regulations, including those governing pollution; protection of the environment; the use, management, and release of hazardous materials, substances and wastes; air emissions; greenhouse gas emissions; water use, supply and discharges; the investigation and remediation of contamination; the manufacture, distribution, and sale of regulated materials, including pesticides; the importing, exporting and transportation of products; and the health and safety of our employees (collectively, “Environmental Laws”). As such, the nature of our current and former operations exposes us to the risk of claims with respect to such matters, including fines, penalties, and remediation obligations that may be imposed by regulatory authorities.
Under certain circumstances, we might be required to curtail operations until a particular problem is remedied. Known costs and expenses under Environmental Laws incidental to ongoing operations, including the cost of litigation proceedings relating to environmental matters, are included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under Environmental Laws or to investigate or remediate potential or actual contamination, and from time to time we establish reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under Environmental Laws and the period during which such costs are likely to be incurred are difficult to predict.
16
While we believe that our operations are currently in material compliance with Environmental Laws, we have, from time to time, received notices of violation from governmental authorities, and have been involved in civil or criminal action for such violations. Additionally, at various sites, our subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with historic operations of the sites. We devote considerable resources to complying with Environmental Laws and managing environmental liabilities. We have developed programs to identify requirements under, and maintain compliance with, Environmental Laws; however, we cannot predict with certainty the effect of increased and more stringent regulation on our operations, future capital expenditure requirements, or the cost of compliance.
The nature of our current and former operations exposes us to the risk of claims with respect to environmental matters and we cannot assure we will not incur material costs and liabilities in connection with such claims. Based on our experience, we believe that the future cost of compliance with existing Environmental Laws, and liabilities for known environmental claims pursuant to such Environmental Laws, will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.
The United States Environmental Protection Agency (the “EPA”) is investigating and planning for the remediation of offsite contaminated groundwater that has migrated from the Omega Chemical Corporation Superfund Site (“Omega Chemical Site”), which is upgradient of the Santa Fe Springs, California facility of our subsidiary, Phibro-Tech, Inc. ("Phibro-Tech"). The EPA has entered into a settlement agreement with a group of companies that sent chemicals to the Omega Chemical Site for processing and recycling ("OPOG") to remediate the contaminated groundwater that has migrated from the Omega Chemical Site in accordance with a general remedy selected by EPA. The EPA has named Phibro-Tech and certain other subsidiaries of PAHC as potentially responsible parties (“PRPs”) due to groundwater contamination from Phibro-Tech’s Santa Fe Springs facility that has allegedly commingled with contaminated groundwater from the Omega Chemical Site. In September 2012, the EPA notified approximately 140 PRPs, including Phibro-Tech and the other subsidiaries, that they have been identified as potentially responsible for remedial action for the groundwater plume affected by the Omega Chemical Site and for EPA oversight and response costs. Phibro-Tech contends that any groundwater contamination at its site is localized and due to historical operations that pre-date Phibro-Tech and/or contaminated groundwater that has migrated from upgradient properties. In addition, a successor to a prior owner of the Phibro-Tech site has asserted that PAHC and Phibro-Tech are obligated to provide indemnification for its potential liability and defense costs relating to the groundwater plume affected by the Omega Chemical Site. Phibro-Tech has vigorously contested this position and has asserted that the successor to the prior owner is required to indemnify Phibro-Tech for its potential liability and defense costs. Furthermore, the members of OPOG filed a complaint under the Comprehensive Environmental Response, Compensation, and Liability Act and the Resource Conservation and Recovery Act in the United States District Court for the Central District of California against many of the PRPs allegedly associated with the groundwater plume affected by the Omega Chemical Site (including Phibro-Tech) for contribution toward past and future costs associated with the investigation and remediation of the groundwater plume affected by the Omega Chemical Site. Due to the ongoing nature of the EPA’s investigation, the preliminary stage of the ongoing litigation and Phibro-Tech’s dispute with the prior owner’s successor, at this time we cannot predict with any degree of certainty what, if any, liability Phibro-Tech or the other subsidiaries may ultimately have for investigation, remediation and the EPA oversight and response costs associated with the affected groundwater plume.
Based upon information available, to the extent such costs can be estimated with reasonable certainty, we estimated the cost for further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, and closure costs for closed sites, to be approximately $4,305 and $5,254 as of March 31, 2021, and June 30, 2020, respectively, which is included in current and long-term liabilities on the consolidated balance sheets. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. For all purposes of the discussion under this caption and elsewhere in this report, it should be noted that we take and have taken the position that neither PAHC nor any of our subsidiaries are liable for environmental or other claims made against one or more of our other subsidiaries or for which any of such other subsidiaries may ultimately be responsible.
17
Claims and Litigation
PAHC and its subsidiaries are party to various claims and lawsuits arising out of the normal course of business including product liabilities, payment disputes and governmental regulation. Certain of these actions seek damages in various amounts. In many cases, such claims are covered by insurance. We believe that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, cash flows or liquidity.
9. Derivatives
We monitor our exposure to foreign currency exchange rates and interest rates and from time-to-time use derivatives to manage certain of these risks. We designate derivatives as a hedge of a forecasted transaction or of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). All changes in the fair value of a highly effective cash flow hedge are recorded in accumulated other comprehensive income (loss).
We routinely assess whether the derivatives used to hedge transactions are effective. If we determine a derivative ceases to be an effective hedge, we discontinue hedge accounting in the period of the assessment for that derivative, and immediately recognize any unrealized gains or losses related to the fair value of that derivative in the consolidated statements of operations.
We record derivatives at fair value in the consolidated balance sheets. For additional details regarding fair value, see “Note 10 — Fair Value Measurements.”
In July 2017, we entered into an interest rate swap agreement on the first $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed interest rate of 1.8325% plus the applicable rate. The agreement matures in June 2022. In March 2020, we entered into an interest rate swap agreement on an additional $150,000 of notional principal that effectively converts the floating LIBOR portion of our interest obligation on that amount of debt to a fixed rate of 0.62% plus the applicable rate. On the maturity of the July 2017 agreement, this agreement increases to a notional principal amount of $300,000 through June 2025, and effectively converts the floating LIBOR portion of our interest obligation on $300,000 of debt to a fixed interest rate of 0.62% plus the applicable rate. The forecasted transactions are probable of occurring, and the interest rate swaps have been designated as highly effective cash flow hedges.
We entered into foreign currency option contracts to hedge cash flows related to monthly inventory purchases. The individual option contracts mature monthly through February 2023. The forecasted inventory purchases are probable of occurring and the individual option contracts were designated as highly effective cash flow hedges.
The following table details the Company’s outstanding derivatives that are designated and effective as cash flow hedges as of March 31, 2021:
Notional
Fair value as of
Amount at
Consolidated
Instrument
Hedge
Balance Sheet
Options
Brazilian Real calls
R$
132,000
(1)
431
126
Brazilian Real puts
(2,710)
(3,900)
Swap
Interest rate swaps
300,000
(2)
(602)
(9,674)
The following tables show the effects of derivatives on the consolidated statements of operations and other comprehensive income (“OCI”) for the three and nine months ended March 31, 2021 and 2020.
Consolidated Statement
Gain (Loss) recognized in consolidated
of Operations line
For the Three Months Ended March 31
Gain (Loss) recorded in OCI
statements of operations
item total
Statement of
Operations
Brazilian Real puts and calls
(836)
(3,945)
(384)
(8)
Interest rate swap
6,585
(6,050)
(825)
59
Gain (Loss) recognized in
For the Nine Months Ended March 31
consolidated statements of operations
Statement
of Operations
1,495
(3,886)
(521)
(116)
9,072
(6,113)
(2,466)
228
We recognize gains (losses) related to foreign currency derivatives as a component of cost of goods sold at the time the hedged item is sold. Realized net losses of $1,826 related to matured contracts were recorded as a component of inventory as of March 31, 2021. We anticipate the net losses included in inventory will be recognized in cost of goods sold within the next twelve months.
10. Fair Value Measurements
Our short-term investments consist of cash deposits held at financial institutions. We consider the carrying amounts of these short-term investments to be representative of their fair value.
Current Assets and Liabilities
We consider the carrying amounts of current assets and current liabilities to be representative of their fair value because of the current nature of these items.
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Contingent Consideration on Acquisitions
We determine the fair value of contingent consideration on acquisitions based on contractual terms, our current forecast of performance factors related to the acquired business and an applicable discount rate.
Debt
We record debt, including term loans and revolver balances, at amortized cost in our consolidated financial statements. We believe the carrying value of the debt is approximately equal to its fair value, due to the variable nature of the instruments and our evaluation of estimated market prices.
We determine the fair value of derivative instruments based upon pricing models using observable market inputs for these types of financial instruments, such as spot and forward currency translation rates.
Non-financial assets
Our non-financial assets, which primarily consist of goodwill, other intangible assets, property and equipment, and lease-related ROU assets, are not required to be measured at fair value on a recurring basis, and instead are reported at carrying value in the consolidated balance sheet. We assess the carrying values of non-financial assets for impairment on a periodic basis or whenever events or changes in circumstances indicate an asset may not be fully recoverable.
Fair Value of Assets (Liabilities)
Level 1
Level 2
Level 3
Foreign currency derivatives
(2,279)
(3,774)
Contingent consideration on acquisitions
(4,840)
There were no transfers between levels during the periods presented.
The contingent consideration on acquisitions is the minimum amount payable in accordance with the acquisition agreement for Osprey.
11. Business Segments
We evaluate performance and allocate resources, based on the Animal Health, Mineral Nutrition and Performance Products segments. Certain of our costs and assets are not directly attributable to these segments and we refer to these items as Corporate. We do not allocate Corporate costs or assets to the segments because they are not used to evaluate the segments’ operating results or financial position. Corporate costs include certain costs related to executive management, business technology, legal, finance, human resources and business development.
We evaluate performance of our segments based on Adjusted EBITDA. We define Adjusted EBITDA as income before income taxes plus (a) interest expense, net, (b) depreciation and amortization, (c) (income) loss from, and disposal of, discontinued operations, (d) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses and loss on extinguishment of debt, and (e) certain items that we consider to be unusual, non-operational or non-recurring.
20
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included herein.
Total segments
6,457
6,665
19,476
19,760
646
629
2,042
1,871
509
1,284
1,303
7,519
7,803
22,802
22,934
Adjusted EBITDA
30,962
34,635
94,412
93,534
5,232
4,055
12,464
11,214
2,929
1,506
7,167
3,815
39,123
40,196
114,043
108,563
Reconciliation of income before income taxes to Adjusted EBITDA
Depreciation and amortization – Total segments
Depreciation and amortization – Corporate
399
445
1,240
1,243
Corporate costs
11,073
10,064
33,162
30,283
425
Acquisition-related cost of goods sold
280
Acquisition-related transaction costs
462
Acquisition-related other
167
Adjusted EBITDA – Total segments
Identifiable assets
565,958
560,663
70,269
65,686
35,291
31,016
671,518
657,365
Corporate
133,499
126,735
The Animal Health segment includes all goodwill of the Company. Corporate assets include cash and cash equivalents, short-term investments, debt issuance costs, income tax-related assets and certain other assets.
12. Subsequent Event
In April 2021, we entered into the 2021 Credit Agreement under which we have the 2021 Term A Loan in an aggregate initial principal amount of $300,000 and the 2021 Revolver under which we can borrow up to $250,000, subject to the terms of the agreement. The 2021 Credit Agreement amends and restates the 2017 Credit Agreement. The 2021 Credit Facilities were used to refinance the outstanding 2017 Term A Loan and 2017 Revolver balances and to pay fees and expenses of the transaction. The 2021 Revolver contains a letter of credit facility.
The 2021 Credit Facilities mature in April 2026. The 2021 Term A Loan is repayable in quarterly installments as set forth below, with the balance payable at maturity.
Payment Date
Quarterly Installment
June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022
1,875
June 30, 2022, September 30, 2022, December 31, 2022, March 31, 2023
3,750
June 30, 2023, September 30, 2023, December 31, 2023, March 31, 2024
June 30, 2024, September 30, 2024, December 31, 2024, March 31, 2025
5,625
June 30, 2025, September 30, 2025, December 31, 2025, March 31, 2026
7,500
Borrowings under the 2021 Credit Facilities bear interest at rates based on the First Lien Net Leverage Ratio, as defined in the 2021 Credit Agreement. The interest rate per annum applicable to the loans under the Credit Facilities will be based on a fluctuating rate of interest equal to the sum of an applicable rate and, at the Company’s election from time to time, either (1) a base rate determined by reference to the highest of (a) the “prime rate” as publicly announced from time to time (b) the federal funds effective rate plus 0.50% and (c) one-month LIBOR plus 1.00%, or (2) a Eurocurrency rate determined by reference to LIBOR with a term as selected by the Company, of one day or one, three or six months (or twelve months or any shorter amount of time if consented to by all of the lenders under the applicable loan). The Credit Facilities have applicable rates equal to (x) 1.00%, in the case of base rate loans, and 2.00%, in the case of LIBOR loans, if the First Lien Net Leverage Ratio is greater than or equal to 3.50:1.00, (y) 0.75%, in the case of base rate loans, and 1.75%, in the case of LIBOR loans, if the 2021 First Lien Net Leverage Ratio is less 3.50:1.00 but greater than or equal to 2.25:1.00, and (z) 0.50%, in the case of base rate loans, and 1.50%, in the case of LIBOR loans, if the First Lien Net Leverage Ratio is less than 2.25:1.00.
The applicable rates under the 2021 Credit Agreement compare with the 2017 Credit Agreement as follows:
First Lien Net
2021 Credit Agreement
Leverage Ratio
Applicable rates*
Base Rate loans
LIBOR loans
≥3.50:1.00
1.00%
2.00%
≥3.00:1.00
≥2.25:1.00 and <3.50:1.00
0.75%
1.75%
≥2.25:1.00 and <3.00:1.00
<2.25:1.00
0.50%
1.50%
* Range of applicable rates, depending upon the First Lien Net Leverage ratio
The Company must pay a quarterly commitment fee based upon the product of (i) the applicable rate as described below and (ii) the actual daily amount by which the aggregate revolving commitments exceed the sum of (A) the outstanding revolving credit loans under the 2021 Revolver and (B) obligations associated with any outstanding letters of credit in the applicable quarterly period. The Company also must pay the letter of credit issuer fees based upon the amount available to be drawn under such letters of credit.
The applicable rate under the Credit Facilities with respect to the commitment fee described in the immediately preceding paragraph is equal to (x) 0.30% if the First Lien Net Leverage Ratio is greater than or equal to 3.50:1.00, (y) 0.25% if the First Lien Net Leverage Ratio is less 3.50:1.00 but greater than or equal to 2.25:1.00, and (z) 0.20% if the First Lien Net Leverage Ratio is less than 2.25:1.00.
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The 2021 Credit Agreement is subject to substantially the same affirmative and negative covenants and events of default as the 2017 Credit Agreement, subject to certain exceptions and thresholds. The 2021 Credit Facilities are secured by substantially the same collateral as the collateral that secured the obligations under the 2017 Credit Agreement, subject to certain exceptions and thresholds.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Our management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. This MD&A should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Our future results could differ materially from our historical performance as a result of various factors such as those discussed in “Risk Factors” and “Forward-Looking Statements.”
Overview of our business
Phibro Animal Health Corporation is a global diversified animal health and mineral nutrition company. We develop, manufacture and market a broad range of products for food animals including poultry, swine, beef and dairy cattle, and aquaculture. Our products help prevent, control and treat diseases, enhance nutrition to help improve health and performance and contribute to balanced mineral nutrition. In addition to animal health and mineral nutrition products, we manufacture and market specific ingredients for use in the personal care, industrial chemical and chemical catalyst industries.
Effects of the COVID-19 pandemic
The global food and animal production industry has experienced demand disruption, production impacts, price declines and currency volatility in international markets due to the COVID-19 pandemic. The response to the global outbreak of COVID-19 continues to evolve. Governmental authorities continue to implement measures to contain virus outbreaks, such as travel bans, quarantines, shelter-in-place orders, site closures and business shutdowns. Although vaccines are now available, distribution efforts vary widely country-by-country and state-by-state. The pandemic may have significant economic impacts on customers, suppliers and markets. New information may continue to emerge concerning COVID-19 and the actions required to contain or treat it may affect the duration and severity of the economic impact. We believe the global food and animal production industry is returning to stability, but the potential impact of COVID-19 continues to evolve and future industry outlooks remain uncertain.
Phibro is an integral participant in the essential production of meat, milk, eggs and fish for human consumption. In the face of the pandemic, we have focused on the safety of our employees, while continuing to supply our customers. Our global production facilities have continued to operate without interruption, despite supply chain and logistical challenges. Our sales and technical service people remain in close virtual contact with our customers, as most travel and in-person meetings have been cancelled. Most of our administrative and management staff are working remotely. We have experienced some cost increases from the safety measures implemented to protect our employees as well as from supply chain disruptions. We have maintained headcount and compensation at or above constant levels. We continue to monitor sales trends, cash flow and liquidity.
The uncertainties surrounding the COVID-19 pandemic remain fluid. We are unable to predict the supply, distribution or effectiveness of COVID-19 vaccines and hence the impact on the economies where we manufacture and sell our products. While we continue to adapt our operations and mitigate the risks and challenges posed by COVID-19, the demand for our products will be dependent upon economic conditions and the ability of our customers and end users of our products to operate their businesses and production facilities. Our business and future operational results may be impacted by government mandated response efforts, supply chain and manufacturing disruptions, increased volatility in raw material costs and decreased demand due to changes in our customer purchasing patterns and preferences. We are unable to predict with confidence the nature and timing of when any of these events may occur and the effects COVID-19 will have on our business, our consolidated results and the broader economic environment going forward. We will continue to evaluate the nature and extent of the effects of COVID-19 on our business, consolidated results of operations, financial condition, and liquidity. For additional considerations and risks associated with COVID-19 on our business, please refer to “Risk Factors” in Item 1A. of our Annual Report.
Trends and uncertainties
In April 2016, the Food and Drug Administration ("FDA") began initial steps to withdraw approval of carbadox via a regulatory process known as a Notice of Opportunity for Hearing ("NOOH"), due to concerns that certain residues from the product may persist in animal tissues for longer than previously determined. The NOOH process provided Phibro with an opportunity to defend the safety of carbadox prior to the FDA taking final steps to remove carbadox from the market. Over the next four years, as part of an ongoing process of responding to the inquiries from the FDA's Center for Veterinary Medicine ("CVM"), we provided extensive and meticulous research and data that confirmed the safety of carbadox. In March 2018, the FDA indefinitely stayed the withdrawal proceedings. In July 2020, the FDA announced it does not agree with Phibro's scientific conclusions that carbadox is safe under the current conditions of use. Instead of proceeding to a hearing on the scientific concerns raised in the 2016 NOOH, consistent with the normal regulatory procedure, the FDA announced that it was withdrawing the current NOOH, and issuing a proposed order to review the regulatory method for carbadox. The approved regulatory method determines if there are residues of carcinogenic concern in animal tissue at the time of slaughter. If the order is finalized, the FDA has indicated it plans to issue a new NOOH proposing the withdrawal of carbadox from the market because of a lack of an approved regulatory method.
In September 2020, Phibro commented on the proposed order, reiterating the safety of carbadox and the appropriateness of the regulatory method, and further offered to work with the CVM to generate additional data to support the existing regulatory method or select a suitable alternative regulatory method. Phibro disagrees with the agency's actions and has submitted a request to the FDA Office of the Commissioner that the agency continue the NOOH process it started in 2016 and proceed with a hearing to review the substantial body of data supporting the safety of carbadox. There is no defined timeline for the conclusion of this matter.Should we be unable to successfully defend the safety of the product, the loss of carbadox sales would have an adverse effect on our financial condition and results of operations. Sales of carbadox for the twelve months ended March 31, 2021, were $19 million.
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Analysis of the consolidated statements of operations
Summary Results of Operations
Change
(in thousands, except per share amounts and percentages)
990
0
(1,399)
(0)
(386)
5,231
801
596
(1,187)
(6)
4,635
(330)
(10)
(1,092)
(11)
*
(5,485)
(882)
(5)
11,212
29
458
1,858
(1,340)
9,354
34
(0.03)
0.23
Weighted average number of shares outstanding
Ratio to net sales
32.7
33.0
32.9
31.9
23.2
22.9
23.8
23.6
9.5
10.1
9.1
8.3
8.4
8.9
8.2
6.4
5.7
6.1
4.5
Effective tax rate
31.6
27.7
26.0
28.7
Certain amounts and percentages may reflect rounding adjustments.
Calculation not meaningful
Net sales, Adjusted EBITDA and reconciliation of GAAP net income to Adjusted EBITDA
We report Net sales and Adjusted EBITDA by segment to understand the operating performance of each segment. This enables us to monitor changes in net sales, costs and other actionable operating metrics at the segment level. See “—General description of non-GAAP financial measures.”
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Segment net sales and Adjusted EBITDA:
(in thousands, except percentages)
(4,140)
(10,849)
(4)
2,342
7,841
(2,796)
(13)
(2,518)
(4,594)
(3)
(5,526)
1,953
(784)
3,631
4,911
(3,673)
878
1
1,177
1,250
1,423
94
3,352
88
(11,073)
(10,064)
(1,009)
(33,162)
(30,283)
(2,879)
28,050
30,132
(2,082)
(7)
80,881
78,280
2,601
Adjusted EBITDA ratio to segment net sales
23.0
24.9
23.7
23.1
9.0
7.2
7.6
6.8
15.3
9.7
14.2
Corporate(1)
(5.2)
(4.8)
(5.4)
(4.9)
Total(1)
13.2
14.3
12.7
The table below sets forth a reconciliation of net income, as reported under GAAP, to Adjusted EBITDA:
(135)
EBITDA
28,633
30,175
(1,542)
83,342
73,357
9,985
(565)
(33)
(425)
(280)
(462)
Acquisition-related other, net
(167)
Certain amounts may reflect rounding adjustments.
* Calculation not meaningful
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Comparison of three months ended March 31, 2021 and 2020
Net sales of $211.7 million for the three months ended March 31, 2021, increased $1.0 million, or less than 1%, as compared to the three months ended March 31, 2020. Animal Health decreased $4.6 million, while Mineral Nutrition and Performance Products increased $2.0 million and $3.6 million, respectively.
Net sales of $134.4 million for the three months ended March 31, 2021, declined $4.6 million, or 3%. Net sales of MFAs and other decreased $4.1 million, or 5%, driven by lower international demand, primarily poultry products in the Latin America region, as well as timing of certain domestic customer orders. Net sales of nutritional specialty products increased $2.3 million, or 7%, principally due to international volume growth in dairy products. Net sales of vaccines declined $2.8 million, or 13%, as challenging economic conditions in Eastern Europe more than offset domestic volume growth and increased demand in the Asia Pacific region.
Net sales of $58.2 million for the three months ended March 31, 2021, increased $2.0 million, or 3%, driven by increased average selling prices. The increase in average selling prices is correlated with the movement of the underlying raw material costs.
Net sales of $19.2 million for the three months ended March 31, 2021, increased $3.6 million, or 23%. The increase was driven by strong demand for copper-based products coupled with favorable product pricing correlated with underlying raw material costs.
Gross profit of $69.2 million for the three months ended March 31, 2021, decreased $0.4 million, or 1%, as compared to the three months ended March 31, 2020. Gross margin decreased 30 basis points to 32.7% of net sales for the three months ended March 31, 2021, as compared to 33.0% for the three months ended March 31, 2020.
Animal Health gross profit decreased $3.2 million due to lower sales and unfavorable product mix. Mineral Nutrition gross profit increased $1.2 million, driven primarily by favorable product mix. Performance Products gross profit increased $1.6 million driven by volumes and favorable product mix.
Selling, general and administrative expenses (“SG&A”) of $49.0 million for the three months ended March 31, 2021, increased $0.8 million, or 2%, as compared to the three months ended March 31, 2020. SG&A for the three months ended March 31, 2020, included $0.6 million of stock-based compensation. Excluding these costs, SG&A increased $1.4 million, or 3%.
Animal Health SG&A increased $0.3 million, due to investments in market expansion initiatives in certain international regions, partially offset by decreased marketing and sales team travel costs driven by COVID-19 limitations. Mineral Nutrition and Performance Products SG&A were comparable to the prior year. Corporate SG&A increased $1.0 million due to investments in strategic initiatives and incremental performance-related compensation costs, partially offset by a decline in travel costs driven by COVID-19 limitations.
Interest expense, net of $2.9 million for the three months ended March 31, 2021, decreased $0.3 million, or 10%, as compared to the three months ended March 31, 2020. Interest expense, net decreased primarily due to favorable variable borrowing rates, partially offset by reduced interest income from short-term investments.
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Foreign currency gains, net
Foreign currency gains, net were $0.6 million for the three months ended March 31, 2021 and 2020.
The provision for income taxes was $5.6 million and $5.2 million for the three months ended March 31, 2021 and 2020, respectively. The effective income tax rate was 31.6% and 27.7% for the three months ended March 31, 2021 and 2020, respectively. The provision for income taxes during the three months ended March 31, 2021, included a $0.6 million expense related to a detailed deferred tax analysis of property, plant, and equipment and intangible assets. The effective income tax rate, without this expense, would have been 27.9% for the three months ended March 31, 2021.
Net income of $12.2 million for the three months ended March 31, 2021, decreased $1.3 million, as compared to net income of $13.5 million for the three months ended March 31, 2020. Operating income declined $1.2 million, driven by lower gross profit and increased SG&A expenses. The decrease in gross profit and the overall gross margin was primarily driven by lower volume and unfavorable product mix in the Animal Health segment, partially offset by increased gross profit in the Mineral Nutrition and Performance Products segments. SG&A expenses increased due to investments in strategic initiatives and incremental performance-related compensation costs, partially offset by a decline in travel costs driven by COVID-19 limitations. Interest expense was lower by $0.3 million, while income tax expense increased $0.5 million.
Adjusted EBITDA of $28.1 million for the three months ended March 31, 2021, declined $2.1 million, or 7%, as compared to the three months ended March 31, 2020. Animal Health Adjusted EBITDA decreased $3.7 million on lower sales and gross profit and increased SG&A costs. Mineral Nutrition Adjusted EBITDA increased $1.2 million, driven by increased gross profit on favorable product mix. Performance Products Adjusted EBITDA increased $1.4 million driven by increased gross profit. Corporate expenses increased $1.0 million, primarily due to investments in strategic initiatives and incremental performance-related compensation costs, partially offset by a decline in travel costs driven by COVID-19 limitations.
Comparison of nine months ended March 31, 2021 and 2020
Net sales of $613.1 million for the nine months ended March 31, 2021, decreased $1.4 million, or less than 1%, as compared to the nine months ended March 31, 2020. Animal Health and Mineral Nutrition declined $5.5 million and $0.8 million, respectively. Performance Products increased $4.9 million.
Net sales of $399.0 million for the nine months ended March 31, 2021, declined $5.5 million, or 1%. Net sales of MFAs and other declined $10.8 million, or 4%, due to reduced demand in China following regulatory changes effective January 1, 2020, and lower volume in Latin America, partially offset by net sales growth in other products and regions, including domestic swine. Net sales of nutritional specialty products grew $7.8 million, or 8%, due to international and domestic volume growth in dairy products, partially offset by lower sales in domestic poultry. Net sales of vaccines declined $2.5 million, or 4%, as challenging economic conditions in Eastern Europe more than offset domestic volume growth and increased demand in the Asia Pacific region.
Net sales of $163.8 million for the nine months ended March 31, 2021, decreased $0.8 million, or less than 1%. Lower overall average selling prices were partially offset by increased unit volumes. The decline in average selling prices is correlated with the movement of the underlying raw material costs.
Net sales of $50.3 million for the nine months ended March 31, 2021, increased $4.9 million, or 11%, driven by increased volumes of copper-based products.
Gross profit of $201.5 million for the nine months ended March 31, 2021, increased $5.2 million, or 3%, as compared to the nine months ended March 31, 2020. Gross margin increased 100 basis points to 32.9% of net sales for the nine months ended March 31, 2021, as compared to 31.9% for the nine months ended March 31, 2020. The nine months ended March 31, 2020, included $0.3 million of acquisition-related cost of goods sold.
Animal Health gross profit increased $0.5 million, due to increased volumes of nutritional specialty products and favorable production costs, primarily related to foreign currency movements. These increases were partially offset by lower volumes of MFAs and other and vaccine products and unfavorable product mix. Mineral Nutrition gross profit increased $1.1 million, driven by favorable raw material costs and product mix, partially offset by declines in average selling prices. Performance Products gross profit increased $3.3 million, driven by higher volume coupled with decreases in raw material and production costs.
Selling, general and administrative expenses (“SG&A”) of $145.8 million for the nine months ended March 31, 2021, increased $0.6 million, or less than 1%, as compared to the nine months ended March 31, 2020. SG&A for the nine months ended March 31, 2021 included $1.1 million of stock-based compensation. SG&A for the nine months ended March 31, 2020, included $1.7 million of stock-based compensation, $0.4 million of restructuring costs, $0.5 million of acquisition-related transaction costs and $0.2 million of other acquisition-related costs. Excluding these costs, SG&A increased $2.3 million, or 2%.
Animal Health SG&A decreased $0.6 million primarily due to the favorable effects of foreign currency exchange and decreased marketing and sales team travel costs driven by COVID-19 limitations. These expense declines were partially offset by increased professional fees to support the continued use of carbadox and investments in market expansion initiatives in certain international regions. Mineral Nutrition and Performance Products SG&A were comparable to the prior year. Corporate expenses increased $2.9 million, driven by investments in strategic initiatives, as well as incremental costs for performance-related compensation, professional fees and information technology. These cost increases were partially offset by lower travel expenses driven by COVID-19 limitations. The stock-based compensation, restructuring costs, acquisition-related transaction costs and other acquisition-related costs resulted in a net $1.7 million decrease to SG&A.
Interest expense, net of $9.0 million for the nine months ended March 31, 2021, decreased $1.1 million, or 11%, as compared to the nine months ended March 31, 2020. Interest expense, net decreased primarily due to favorable variable interest rates, partially offset by higher levels of debt outstanding and lower interest income from short-term investments.
Foreign currency gains, net for the nine months ended March 31, 2021, were $3.6 million, as compared to net losses of $1.9 million for the nine months ended March 31, 2020. Foreign currency gains primarily arose from intercompany balances, driven by the movement of the Mexican, South African, Turkish and Brazilian currencies relative to the U.S. dollar.
The provision for income taxes was $13.1 million and $11.2 million for the nine months ended March 31, 2021 and 2020, respectively. The effective income tax rate was 26.0% and 28.7% for the nine months ended March 31, 2021 and 2020, respectively. The provision for income taxes during the nine months ended March 31, 2021, included (i) a $1.5 million benefit for the years ended June 30, 2020 and 2019 related to final regulations issued in July 2020 for the Global Intangible Low-Taxed Income (“GILTI”) tax, (ii) an $0.8 million benefit related to exchange rate differences on intercompany dividends, (iii) a $0.6 million benefit for the reversal
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of an uncertain tax position and (iv) a $0.6 million expense related to a detailed deferred tax analysis of property, plant, and equipment and intangible assets. The effective income tax rate, without these items, would have been 30.3% for the nine months ended March 31, 2021.
Net income of $37.3 million for the nine months ended March 31, 2021, increased $9.4 million, as compared to net income of $27.9 million for the nine months ended March 31, 2020. The increase was primarily driven by higher operating income of $4.6 million, lower interest expense of $1.1 million and increased foreign currency gains of $5.5 million, partially offset by a $1.9 million increase to the provision for income taxes. The increase in operating income was driven by a $5.2 million increase in gross profit, partially offset by increased SG&A costs of $0.6 million.
Adjusted EBITDA of $80.9 million for the nine months ended March 31, 2021, increased $2.6 million, or 3%, as compared to the nine months ended March 31, 2020. Animal Health Adjusted EBITDA increased $0.9 million, driven by increased gross profit and lower SG&A expenses. Mineral Nutrition and Performance Products Adjusted EBITDA increased $1.3 million and $3.4 million, respectively, on higher gross profit. Corporate expenses increased $2.9 million driven by investments in strategic initiatives as well as incremental costs for performance-related compensation, professional fees and information technology. These cost increases were partially offset by lower travel expenses driven by COVID-19 limitations.
Analysis of financial condition, liquidity and capital resources
Net increase (decrease) in cash and cash equivalents was:
Cash provided (used) by:
Operating activities
(10,235)
Investing activities
99,467
Financing activities
(47,583)
Effect of exchange-rate changes on cash and cash equivalents
1,936
Net increase/(decrease) in cash and cash equivalents
43,585
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Net cash provided (used) by operating activities was comprised of:
Adjustments:
Acquisition other, net
Interest paid, net
(8,123)
(9,171)
1,048
Income taxes paid
(14,335)
(15,045)
710
Changes in operating assets and liabilities and other items
(13,187)
1,407
(14,594)
Operating activities provided $45.2 million of net cash for the nine months ended March 31, 2021. Cash provided by net income and non-cash items, including depreciation and amortization, was $56.2 million. Cash used in the ordinary course of business for changes in operating assets and liabilities and other items was $11.0 million. Accounts receivable used $8.4 million of cash due to increased domestic sales and timing of collections, partially offset by lower sales and favorable collections in international regions. Cash used for inventory was $8.1 million. Inventory increases were primarily due to forecasted future demand and internal production schedules. For certain products, we are maintaining safety stocks to mitigate potential disruptions in production. Other assets and accounts payable used $1.0 million and $0.8 million of cash, respectively. Prepaid expenses and other current assets provided $3.7 million of cash due to timing of domestic payments. Accrued expenses and other liabilities provided cash of $3.6 million due to timing of payments for employee-related liabilities, partially offset by payments made for environmental remediation procedures.
Investing activities used $11.4 million of net cash for the nine months ended March 31, 2021. Capital expenditures were $22.2 million as we continued to invest in expanding production capacity and productivity improvements. Net proceeds from maturities of short-term investments were $11.0 million.
Financing activities used $21.6 million of net cash for the nine months ended March 31, 2021. Net borrowings on our Revolver provided $7.0 million. We paid $14.6 million in dividends to holders of our Class A and Class B common stock. We paid $14.1 million in scheduled debt and other requirements.
Liquidity and capital resources
In April 2021, we entered into an amended and restated credit agreement (the “2021 Credit Agreement”) under which we have a term A loan in an aggregate initial principal amount of $300 million (the “2021 Term A Loan”) and a revolving credit facility under which we can borrow up to $250 million, subject to the terms of the agreement (the “2021 Revolver” and together with the 2021 Term A Loan, the “2021 Credit Facilities”). The 2021 Credit Agreement amends and restates the credit agreement entered into in June 2017 (the “2017 Credit Agreement”). The 2021 Credit Facilities were used to refinance all of the Term A loans and revolving credit facility amounts outstanding under the 2017 Credit Agreement and to pay fees and expenses of the transaction. The 2021
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Revolver contains a letter of credit facility. The 2021 Credit Facilities mature in April 2026. Refer to “Note 12 – Subsequent Event” for further information.
We believe our cash on hand, operating cash flow and financing arrangements, including the availability of borrowings under the 2021 Revolver and foreign credit lines, will be sufficient to support our ongoing cash needs. We are aware of the current and potential future effects of COVID-19 on the financial markets. We expect adequate liquidity for at least the next twelve months. However, we can provide no assurance that our liquidity and capital resources will be adequate for future funding requirements. We believe we will be able to comply with the terms of the covenants under the 2021 Credit Facilities and foreign credit lines based on our operating plan. In the event of adverse operating results and/or violation of covenants under the facilities, there can be no assurance we would be able to obtain waivers or amendments. Other risks to our meeting future funding requirements include global economic conditions and macroeconomic, business and financial disruptions that could arise, including those caused by COVID-19. There can be no assurance that a challenging economic environment or an economic downturn would not affect our liquidity or our ability to obtain future financing or fund operations or investment opportunities. In addition, our debt covenants may restrict our ability to invest.
Certain relevant measures of our liquidity and capital resources follow:
(in thousands, except ratios)
Cash and cash equivalents and short-term investments
93,103
91,343
Working capital
233,161
222,006
Ratio of current assets to current liabilities
2.60:1
We define working capital as total current assets (excluding cash and cash equivalents and short-term investments) less total current liabilities (excluding current portion of long-term debt). We calculate the ratio of current assets to current liabilities based on this definition.
As of March 31, 2021, we had $176.0 million in outstanding borrowings under the 2017 Revolver and had outstanding letters of credit and other commitments of $2.7 million, leaving $71.3 million available for borrowings and letters of credit.
We currently intend to pay quarterly dividends on our Class A and Class B common stock, subject to approval from the Board of Directors. Our Board of Directors declared a cash dividend of $0.12 per share on Class A and Class B common stock, payable on June 23, 2021. Our future ability to pay dividends will depend upon our results of operations, financial condition, capital requirements, our ability to obtain funds from our subsidiaries and other factors that our Board of Directors deems relevant. Additionally, the terms of our current and any future agreements governing our indebtedness could limit our ability to pay dividends or make other distributions.
As of March 31, 2021, our cash and cash equivalents and short-term investments included $92.6 million held by our international subsidiaries. There are no restrictions on cash distributions to PAHC from our international subsidiaries.
Contractual obligations
During the three months ended March 31, 2021, we amended and extended the lease agreement for our corporate office, increasing the value of our lease commitments. For the nine months ended March 31, 2021, the total right of use assets obtained in exchange for new operating lease liabilities were $13.9 million. As of our March 31, 2021, our total lease commitment value was $40.0 million.
In April 2021, we entered into the 2021 Credit Agreement. Refer to “Note 12 – Subsequent Event” for further information.
There were no other material changes in payments due under contractual obligations from those disclosed in the Annual Report.
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Off-balance sheet arrangements
We do not currently use off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, investment or other financial purposes.
In the ordinary course of business, we may indemnify our counterparties against certain liabilities that may arise. These indemnifications typically pertain to environmental matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to certain restrictions and limitations.
Adjusted EBITDA is an alternative view of performance used by management as our primary operating measure, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted EBITDA to portray the results of our operations prior to considering certain income statement elements. We have defined EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision for income taxes or less benefit for income taxes, and (iii) depreciation and amortization. We have defined Adjusted EBITDA as EBITDA plus (a) (income) loss from, and disposal of, discontinued operations, (b) other expense or less other income, as separately reported on our consolidated statements of operations, including foreign currency gains and losses, and (c) certain items that we consider to be unusual, non-operational or non-recurring. The Adjusted EBITDA measure is not, and should not be viewed as, a substitute for GAAP reported net income.
The Adjusted EBITDA measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how our Adjusted EBITDA measure is utilized:
Despite the importance of this measure to management in goal setting and performance measurement, Adjusted EBITDA is a non-GAAP financial measure that has no standardized meaning prescribed by GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDA, unlike GAAP net income, may not be comparable to the calculation of similar measures of other companies. Adjusted EBITDA is presented to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the Adjusted EBITDA measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the Adjusted EBITDA measure is that it provides a view of our operations without including all events during a period, such as the depreciation of property, plant and equipment or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies.
Certain significant items
Adjusted EBITDA is calculated prior to considering certain items. We evaluate such items on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual or non-operational nature. Unusual, in this context, may represent items that are not part of our ongoing business and items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis.
We consider acquisition-related activities and business restructuring costs related to productivity and cost-saving initiatives, including employee separation costs, to be unusual items that we do not expect to occur as part of our normal business on a regular basis. We consider foreign currency gains and losses to be non-operational because they arise principally from intercompany transactions and are largely non-cash in nature.
New accounting standards
For discussion of new accounting standards, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies and New Accounting Standards.”
Critical Accounting Policies
Critical accounting policies are those that require application of management’s most difficult, subjective and/or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all accounting policies require management to make difficult, subjective or complex judgments or estimates. In presenting our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results that differ from our estimates and assumptions could have an unfavorable effect on our financial position and results of operations. Critical accounting policies include revenue recognition, business combinations, long-lived assets, goodwill, and income taxes.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain. The pandemic may affect our future sales, expenses, reserves and allowances, manufacturing operations and employee-related costs. The pandemic may have significant economic impacts on our customers, suppliers and markets where we compete and operate. New information may continue to emerge concerning COVID-19, and the actions required to contain or treat it may affect the duration and severity of the pandemic. Our financial statements include estimates of the effects of COVID-19 and there may be changes to those estimates in future periods.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “believe,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Examples of such risks and uncertainties include:
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While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements are expressly qualified in
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their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of operations, we are exposed to market risks arising from adverse changes in interest rates, foreign currency exchange rates and commodity prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. We use, from time to time, foreign currency contracts and interest rate swaps as a means of hedging exposure to foreign currency risks and fluctuating interest rates, respectively. We do not utilize derivative instruments for trading or speculative purposes. We do not hedge our exposure to market risks in a manner that eliminates the effects of changing market conditions on earnings, cash flows and fair values. We monitor the financial stability and credit standing of our major counterparties.
For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures about Market Risk” section in the Annual Report and to the notes to the consolidated financial statements included therein. As of the date of this report, there were no material changes in the Company’s financial market risks from the risks disclosed in the Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation as of March 31, 2021, our Chief Executive Officer and Chief Financial Officer each concluded that, as of the end of such period, our disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, as described in Management’s Report on Internal Control over Financial Reporting in “Item 9A. Controls and Procedures” in the Annual Report.
Material Weakness Remediation Efforts
We continue to make further progress in implementing changes to our internal controls over financial reporting to remediate the material weaknesses described in "Item 9A. Controls and Procedures" in the Annual Report.
During the quarter ended September 30, 2020, we completed a gap analysis of our key controls. In completing this analysis, we identified areas where new controls were needed and enhancements to existing controls, policies and procedures needed to be made.
We continue to execute further steps in our remediation plan by enhancing and supplementing the finance team through an increased number of compliance-focused roles, reassigning responsibilities, and adding additional resources with an appropriate level of knowledge and experience commensurate with our financial reporting requirements. During the quarter ended March 31, 2021, we hired a Vice President, Global Tax and a Manager of Internal Controls in North America, as well as appointed managers to oversee Sarbanes-Oxley (“SOX”) compliance in each of our key regions, reporting to our VP of Finance and Internal Controls, in order to better align our resources to our financial reporting requirements and strengthen, monitor and support our remediation efforts.
Our actions to address the material weaknesses have included the design and implementation of additional formal accounting policies and procedures to ensure transactions are properly initiated, recorded, processed, reported, and appropriately authorized and approved across our key business cycles. During the quarter ended March 31, 2021, and with the oversight of our Board of Directors, we enhanced our delegation of authority and established new management authorization levels. We also initiated a global SOX awareness program, featuring the Chief Executive Officer of the Company and other key members of management to continue to emphasize the importance of SOX and the related compliance procedures for our company as part of the overall training and education element of our remediation plan.
Our efforts include ensuring access to key financial systems and records is restricted to appropriate users and the appropriate level of segregation of duties is maintained. During the quarter ended March 31, 2021, and in accordance with our remediation plan, we have finalized the design and implementation of user access controls and segregation of duties monitoring controls and made continued improvements by reducing the number of segregation of duties conflicts within our key financial systems and evaluated mitigating controls. We continue to evaluate opportunities to limit access and modify responsibilities of certain personnel.
We are committed to maintaining a strong control environment and believe that these remediation efforts represent continued improvements in our control environment. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may determine it is necessary to take additional actions to address control deficiencies or modify certain of the remediation measures. While we have made progress in accordance with our remediation plan, the material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We cannot yet determine when our remediation plan will be fully completed, and we cannot provide any assurance that these remediation efforts will be successful or that our internal controls over financial reporting will be effective as a result of these efforts.
Changes in Internal Control over Financial Reporting
Other than the changes discussed above in connection with the changes designed and implemented as a result of our remediation plan of the previously identified material weaknesses, there were no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended March 31, 2021.
Item 1.Legal Proceedings
Information required by this Item is incorporated herein by reference to “Notes to the Consolidated Financial Statements—Commitments and Contingencies” in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the “Risk Factors” section in the Annual Report, which could materially affect our business, financial condition or future results.
There were no material changes in the Company’s risk factors from the risks disclosed in the Annual Report.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
6.Exhibits
Exhibit 31.1
Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
Exhibit 31.2
Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
Exhibit 32.1
Chief Executive Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
Exhibit 32.2
Chief Financial Officer—Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
Exhibit 101 .INS*
XBRL Instance Document
Exhibit 101.SCH*
XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Furnished with this Quarterly Report. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933 and are deemed not filed for purposes of section 18 of the Exchange Act.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
May 6, 2021
By:
/s/ Jack C. Bendheim
Jack C. Bendheim
Chairman, President and Chief Executive Officer
/s/ Damian Finio
Damian Finio
Chief Financial Officer